With the coronavirus crisis, investors are in the middle of one of the swiftest stock market declines in history. The TSX Composite Index reached an all-time high on February 17, 2020. In just one month, it fell to a level last seen in August 2012 – erasing eight years of gains in seemingly the blink of an eye. The big question on the minds of investors during this stock market crash is whether to buy now or stay the course.
On the one hand, investors in their asset accumulation years may feel tempted to buy now. Stocks are “on sale” and markets have always (eventually) recovered and surpassed previous highs. Indeed, investors haven’t seen a “sale” like this since the depths of the financial crisis in 2009. Opportunities abound.
On the other hand, we still don’t know the full extent of the damage that will be caused by the coronavirus global pandemic. Economies around the world have ground to a halt. Supply chains have been disrupted. Travel is non-existent. It’s hard to fathom how markets can move higher in the short-term when life as we know it is at a standstill. In this article, we’ll look at each option and explore whether now is the right time to buy stocks or stay the course.
Argument for Buying Stock Now
It seems counterintuitive to think that falling stock markets can be a good thing for investors. But billionaire investor Warren Buffett uses a terrific thought experiment to help us understand how this works:
“If you plan to eat hamburgers throughout your life, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time, should you prefer higher or lower car prices?”
Of course, the answer is that lower prices are better for the consumers of these products. Comparatively, low stock prices are good for the “consumers” of those stocks. Still skeptical? Let’s look at the numbers.
Imagine you regularly invested $1,000 per month into Vanguard’s Canada All Cap Index ETF (VCN). In 12 months, you would have purchased 359.20 units of VCN for an average of $33.42.
Fast forward to the coronavirus market crash. On March 18, the price of VCN plummetted to $24.83. It has fallen $8.49 (more than 25%) from the average price you paid last year.
If you invested all $12,000 today, that would give you a total of 483.28 units of VCN – which is a full 124 more units than you were able to purchase last year. Assuming the price recovers to $33.42 at some point, your 483.28 units will be worth $16,151. That’s the power of buying at a discount today. More shares or units, which will lead to a great account value in the future.
The key is a long-term time horizon. If you have one, it’s safe to assume stocks will eventually recover and the purchases you make now at these depressed prices will be worth much more in the future (when you actually need the money).
Another way to look at stock market valuations today is to imagine whether the world’s most valuable companies – I’m talking Apple, Facebook, Alphabet, Amazon, etc. – are truly worth 25-30% less today than they were one month ago. Ask yourself if Canada’s banks – as a business – are truly worth 25-30% less than they were one month ago.
If you don’t believe these businesses are suddenly less valuable as a player in the global economy, then it seems reasonable to believe that now is a good time to invest in the largest companies in the world.
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Argument For Staying The Course
As much as it can make sense for investors to add to their portfolio right now, the idea of investing in the middle of a market crash may not sit right with other investors. In fact, it could be downright scary, and it may take every ounce of strength to not “panic-sell” everything (don’t do that!).
Indeed, it could take months if not years for markets to recover to their previous highs. Heck, prices could fall even further as the full impact of COVID-19 is realized throughout the global economy.
Case in point: the TSX Composite Index reached a high of $14,714 in May 2008 before the global financial crisis caused stock markets around the world to freefall. It took a full six years (May 2014) for the TSX to return to its former market highs (not including dividends). That’s a long time for investors to wait for a recovery.
Investing right now, in the midst of this current market crash, would be analogous to investing in September 2008 after markets had already fallen by 25%. In reality, we were nowhere near the bottom at that point – it wasn’t until February 2009 when markets had completely bottomed out at a total loss of 45%.
Making a market timing call to invest in September 2008 may not have been disastrous to your portfolio if you managed to hold on through the next six months of pain and not lose your nerve. But that’s a tall order for investors who aren’t used to seeing their portfolios almost get cut in half.
Staying the course means sticking with your investment plan, no matter what the markets are doing. That assumes you have an appropriate asset allocation that suits your risk tolerance, and that you regularly contribute to your investments without a hint of market timing.
Also, you find yourself reeling from the financial hit, you may want to re-assess your risk tolerance. Many investors likely overestimated their risk tolerance during the 10+ year-long bull market, opting for a higher stock allocation to participate in market gains. But while that additional risk can help earn higher returns in good times, it can also expose your portfolio to substantial losses during a market crash. Now that you’ve discovered your true risk tolerance, it’s a great time to rebalance your portfolio into an allocation you can stomach in both good times and bad.
The Hybrid Approach (Best of Both Worlds)
To be clear, staying the course during a market crash doesn’t mean “do nothing.” If you have a portfolio of stocks and bonds, chances are the percentage of bonds in your portfolio has gone up, while the percentage of stocks has gone down. That means it’s time to rebalance, and there are two ways to do this.
You can rebalance by selling bonds and using the proceeds to buy more stocks. There’s a reason why rebalancing is called “the only free lunch in investing.” It’s because it forces you to sell what has gone up (in this case, bonds), and buy what has gone down in value (in this case, stocks).
The key is to use a predetermined rule to trigger your portfolio rebalance. For instance, if you have a balanced portfolio of 60% stocks and 40% bonds you may want to rebalance anytime stocks are up or down 5%.
Rebalancing isn’t as complicated as it sounds unless you hold an unwieldy portfolio of stocks and bonds across multiple accounts. Thankfully, there have been tremendous improvements in products for self-directed investors and for investors who prefer a hands-off approach.
I’m a big fan of asset allocation ETFs like Vanguard’s VBAL (60/40) or VGRO (80/20). These one-ticket solutions invest broadly in stocks and bonds across the globe – often holding tens of thousands of securities in just one ETF. The benefit for investors is that these ETFs automatically rebalance every day to constantly maintain their asset mix. That means no tinkering for investors – so in times like this, investors can enjoy the benefits of rebalancing and constantly buying stocks at lower prices without adding new money.
Get a Robo Advisor
Alternatively, investors looking for a truly hands-off approach can invest with a robo advisor and get the same globally diversified portfolio with automatic rebalancing. Check out our comprehensive guide to Canada’s best robo advisors to find one that suits your investing style. We’re partial to Wealthsimple – our top robo advisor – as it strikes the right balance between low fees, an easy-to-use functional platform, and excellent client perks.
A robo advisor can take the emotion out of investing by assigning clients with a model portfolio and adopting a rules-based approach to rebalancing. Robo advisors like Wealthsimple maintain excellent communication with their clients, reassuring them through turbulent times in the market and reminding clients to stick to their plan. Now is a great time to sign up because Wealthsimple is offering Young and Thrifty readers an exclusive deal: get a $100 cash bonus open and fund your first Wealthsimple Invest account (min. $1,000 initial deposit).
Closing Argument: How Do You Know Whether to Buy or Stay the Course?
Investors face an extraordinary dilemma during this coronavirus crisis. Markets have fallen so quickly that it feels like we should be doing something to protect our portfolios. At the same time, since markets have already fallen 25-30%, many experts are screaming at investors to “back up the truck” and buy now.
Listen, this is more of a personal finance question than an investing question. If you’re struggling to get by due to a temporary loss in wages or a lay-off, the last thing you should be doing is adding to your retirement portfolio. You need to focus instead on trimming costs, shoring up your emergency savings, and doing everything you can to weather the storm over the coming months.
For those whose employment is more secure, and who already have a financial cushion in place, now is a great time to take advantage of depressed stock prices and add a lump sum to your portfolio. Consider front-loading your monthly contributions and invest the entire amount now, either by tapping into a line of credit or trimming some of your savings.
Many of us will fall somewhere in between these two scenarios, and in that case, I recommend the hybrid approach – hang onto your current investments and continue to add regular contributions every month.
What we can all do during these trying times is realistically assess our risk tolerance and determine an asset allocation that we can live with.
This is where a robo advisor can help. When you fill out your risk assessment, you’ll answer questions about your investment experience, goals, and time horizon. More importantly, you’ll be asked about your risk tolerance – how you’ll feel about market losses and gains. Hopefully, we all know a little bit more about ourselves. We know how we feel about our portfolio dropping in value because we’ve lived through this crisis. And, we have a better understanding of our true tolerance for risk.